Deemed distributions - is loan still outstanding?

[Guest jy12443]

Facts: plan allows one outstanding loan at a time; participant takes loan and defaults and loan is deemed distributed; months later the plan allows participant to take a subsequent loan.

I know the loan regs state that a loan that is deemed to be distributed ceases to be an outstanding loan for purposes of Section 72(p), except for purposes of determining max amount of subsequent loans.

Based on that reg, would you agree that for purposes of the plan's one outstanding loan rule, there is no operational failure since the defaulted loan would not be considered outstanding for that purpose. Understanding that there could be a violation if the amount of the 2nd loan exceeds the maximum loan amount when taking the defaulted loan into consideration.

Thank you in advance for any responses.

[ETA Consulting LLC]

A deemed distribution is still an outstanding loan until there is a distributable event (i.e. age 59 1/2 or termination of employment).

Good Luck!

[masteff]

A keyword is "offset".

From Reg 1.72(p)-1:

"Q-13: How does a reduction (offset) of an account balance in order to repay a plan loan differ from a deemed distribution?

A-13: (a) Difference between deemed distribution and plan loan offset amount. (1) Loans to a participant from a qualified employer plan can give rise to two types of taxable distributions—

(i) A deemed distribution pursuant to section 72(p); and

(ii) A distribution of an offset amount.

(2) As described in Q&A-4 of this section, a deemed distribution occurs when the requirements of Q&A-3 of this section are not satisfied, either when the loan is made or at a later time. A deemed distribution is treated as a distribution to the participant or beneficiary only for certain tax purposes and is not a distribution of the accrued benefit. A distribution of a plan loan offset amount (as defined in § 1.402©-2, Q&A-9(b)) occurs when, under the terms governing a plan loan, the accrued benefit of the participant or beneficiary is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the accrued benefit). A distribution of a plan loan offset amount could occur in a variety of circumstances, such as where the terms governing the plan loan require that, in the event of the participant's request for a distribution, a loan be repaid immediately or treated as in default.

(b) Plan loan offset. In the event of a plan loan offset, the amount of the account balance that is offset against the loan is an actual distribution for purposes of the Internal Revenue Code, not a deemed distribution under section 72(p). Accordingly, a plan may be prohibited from making such an offset under the provisions of section 401(a), 401(k)(2)(B) or 403(b)(11) prohibiting or limiting distributions to an active employee. See § 1.402©-2, Q&A-9©, Example 6. See also Q&A-19 of this section for rules regarding the treatment of a loan after a deemed distribution."